EBA FINAL DRAFT RTS ON OWN FUNDS REQUIREMENTS FOR INVESTMENT FIRMS
BASED ON FIXED OVERHEADS
EBA/RTS/2014/01
29 January 2014
EBA FINAL draft Regulatory Technical
Standards
on own funds requirements for investment firms based on fixed
overheads under Article 97(4) of Regulation (EU) No 575/2013
(Capital Requirements Regulation – CRR)
EBA FINAL DRAFT RTS ON OWN FUNDS REQUIREMENTS FOR INVESTMENT FIRMS BASED ON
FIXED OVERHEADS
Contents
1. Executive Summary
3
2. Background and rationale
5
3. EBA FINAL draft Regulatory Technical Standards on own funds requirements for investment
firms based on fixed overheads under Article 97(4) of Regulation (EU) No 575/2013 (Capital
Requirements Regulation – CRR)
7
4. Accompanying documents
14
4.1
Cost- Benefit Analysis / Impact Assessment
14
4.2
Feedback on the public consultation
18
Summary of key issues and the EBA’s response
Summary of responses to the consultation and the EBA’s analysis
18
19
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EBA FINAL DRAFT RTS ON OWN FUNDS REQUIREMENTS FOR INVESTMENT FIRMS BASED ON
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1. Executive Summary
The EBA is mandated in Article 97(4) of Regulation (EU) No 575/2013 (CRR) to develop, in
consultation with the European Securities and Markets Authority (ESMA), draft regulatory
technical standards (RTS) on own funds requirements for investment firms with limited
authorisation to provide investment services, as set out in Articles 95 and 96 of the CRR.
Specifically, investment firms are required to hold eligible capital of at least one-quarter of the
fixed overheads of the previous year, or projected fixed overheads in the case of an investment
firm not having completed business for one year. These final draft RTS outline the calculation of
fixed overheads and other aspects relevant for this purpose.
These final draft RTS are also relevant to management companies, as defined under the
Undertakings for Collective Investment in Transferable Securities (UCITS) Directive, and
alternative investment fund managers (AIFMs), both internal and external managers of
alternative investment funds (AIFs), as defined under the AIFM Directive (AIFMD)1.
The aim of these final draft RTS is to harmonise calculations of capital requirements and to
provide a clear definition of fixed overheads. The CRR does not introduce any new or additional
own funds requirements for investment firms, as the requirements will not differ from those set
down in Directive 2006/49/EC.
These final draft RTS also aim to harmonise the conditions under which competent authorities can
make adjustments to the capital requirement in a case where there has been a material change in
the business activities of an investment firm. A change in business activities is considered material
if the fixed overheads change by at least 20% or there is an absolute change of EUR 2 million in
the capital requirement.
The approach for calculating fixed overheads proposed by these final draft RTS is a so-called
subtractive approach, whereby variable cost items are deducted from the total expenses as
calculated according to the applicable accounting framework. The subtractive approach ensures
that changes to the accounting framework are automatically taken into account and cannot be
arbitraged by changing the accounting categorisation. It can also be used in cases where a firm
does not use the International Financial Reporting Standards (IFRS) accounting framework and is,
therefore, appropriate for smaller or limited-authorisation investment firms, towards which these
draft RTS are, to a large extent, targeted.
The introduction of the subtractive approach changes the existing practices in some EU Member
States, where a so-called additive approach is already in place. The additive approach consists of
adding up a number of pre-defined accounting items, but the existence of many different national
1
Article 7(1)(a)(iii) UCITS Directive (2009/65/EC) and Article 9(5) AIFMD (2011/61/EU) require management companies
and AIFMs to have own funds that must at no time be less than the amount prescribed in Article 21 of
Directive 2006/49/EC (now Article 97 of the CRR).
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EBA FINAL DRAFT RTS ON OWN FUNDS REQUIREMENTS FOR INVESTMENT FIRMS BASED ON
FIXED OVERHEADS
accounting standards makes this approach impractical; furthermore, the additive approach is
considered less prudent. This approach was also considered less appropriate by most market
participants who responded to the public consultation.
These final draft RTS also propose the inclusion of the use of tied agents in the calculation of fixed
overheads, because business carried out through a tied agent exposes an investment firm to risk
in the same manner as business carried out by the investment firm itself. Furthermore, there
should not be incentives for firms to reduce their capital requirements through the use of these
agents. Therefore, a firm should maintain a capital component for tied agents. As calculating fixed
overheads for tied agents in the same manner as for investment firms themselves would pose
many practical problems, the use of a fixed percentage of all fees per tied agent is introduced
instead. This addresses the fact that tied agents have some element of variability in some cases
but probably cannot be considered a fully variable cost item.
As required in Article 97 of the CRR, the EBA has consulted ESMA on these final draft RTS in order
to ensure that a consistent framework for investment firms shall be implemented.
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EBA FINAL DRAFT RTS ON OWN FUNDS REQUIREMENTS FOR INVESTMENT FIRMS BASED ON
FIXED OVERHEADS
2. Background and rationale
The EBA has developed these final draft RTS in accordance with the mandate contained in
Article 97(4) of the CRR.
These final draft RTS complement the text of the final draft RTS on own funds, submitted by EBA
on 26 July 20132, but they focus only on certain investment firms with limited authorisation to
provide investment services.
Background and regulatory approach followed in the draft RTS
Until the adoption of the CRR, the regulatory framework of own funds was derived from the socalled Capital Requirements Directive (CRD), in particular Articles 56 to 67 of
Directive 2006/48/EC and Articles 12 to 17 of Directive 2006/49/EC, as transposed by each
Member State. Even though most of the business activities of investment firms are covered by
Directive 2004/39/EC (MiFID) and have to be authorised under MiFID first, certain investment
firms are excluded from the scope of the CRR/CRD framework, e.g. local firms and investment
firms as set out in Article 4(2)(c). Therefore, the CRR’s definition of ‘investment firm’ is more
limited than that of MiFID. The CRR/CRD regulate prudential supervision of investment firms,
which includes provisions for own funds requirements.
These final draft RTS are also relevant to management companies, as defined under the UCITS
Directive, and AIFMs, both internal and external managers of AIFs, as defined under the AIFMD.
Article 7(1)(a)(iii) of the UCITS Directive and Article 9(5) of the AIFMD require management
companies and AIFMs to have own funds that must at no time be less than the amount prescribed
in Article 21 of Directive 2006/49/EC (now Article 97 of the CRR).
These final draft RTS are related to Article 97(4) of the CRR, which states that the EBA in
consultation with ESMA shall develop draft RTS to specify in greater detail:
1.
2.
3.
the calculation of the requirement to hold eligible capital of at least one-quarter of the fixed
overheads of the previous year;
the conditions for the adjustment by the competent authority of the requirement to hold
eligible capital of at least one-quarter of the fixed overheads of the previous year; and
the calculation of projected fixed overheads in the case of an investment firm that has not
completed business for one year.
Pursuant to Article 95(2) of the CRR, investment firms with limited authorisation to provide
investment services, referred to in Article 95(1), shall calculate their total risk exposure amount
either as the sum of points (a) to (d) and (f) of Article 92(3) of the CRR after applying Article 92(4),
2
http://www.eba.europa.eu/regulation-and-policy/own-funds/draft-regulatory-technical-standards-on-own-funds
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EBA FINAL DRAFT RTS ON OWN FUNDS REQUIREMENTS FOR INVESTMENT FIRMS BASED ON
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or as the result of 12.5 multiplied by the amount of one-quarter of their fixed overheads for the
preceding year, whichever is higher. For investment firms referred to in Article 96(1) of the CRR,
the total risk exposure amount shall be calculated as the sum of the items referred to in points (a)
to (d) and (f) of Article 92(3) of the CRR after applying Article 92(4) and 12.5 multiplied by the
amount of one-quarter of their fixed overheads for the preceding year. This means that in both of
these cases the amount of own funds shall be calculated taking into account the amount of fixed
overheads for the previous year.
The provisions included in these final draft RTS focus on the items that comprise the amount of
fixed overheads of the previous year based on the most recent audited annual financial
statements. Where there is a change in the business of an investment firm that the competent
authority considers material, the competent authority may adjust the requirement for eligible
capital, as provided for in Article 97(2) of the CRR. A change in business activities is considered
material if the fixed overheads change by at least 20% or there is an absolute change of
EUR 2 million in the capital requirement. These RTS also elaborate on the calculation of projected
fixed overheads; this projection shall be used where an investment firm has not completed
business for one year.
The EBA has developed these final draft RTS on the basis of the CRR. As required in Article 97
thereof, the EBA has consulted ESMA on these RTS in order to ensure a consistent framework for
investment firms. The EBA has to submit these final draft RTS to the European Commission (EC)
before 1 March 2014.
The nature of RTS under EU law
These final draft RTS are produced in accordance with Article 10 of the relevant EBA regulation3.
Pursuant to Article 10(4) of the regulation, these final draft RTS shall be adopted by means of a
regulation or decision.
In accordance with EU law, EU regulations are binding in their entirety and directly applicable in
all Member States. This means that, on the date of their entry into force, they become part of the
national law of the Member States and that their implementation into national law is not only
unnecessary but also prohibited by EU law, except in so far as this is expressly required by them.
Shaping these rules in the form of a regulation will ensure a level playing field by preventing
divergent national requirements and will facilitate the cross-border provision of services;
currently, an institution that wishes to take up operations in another Member State has to apply
different sets of rules.
3
Regulation (EU) No 1093/2010 of the European Parliament and of the Council of 24 November 2010, establishing a
European Supervisory Authority (European Banking Authority), amending Decision No 716/2009/EC and repealing
Commission Decision No 2009/78/EC.
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EBA FINAL DRAFT RTS ON OWN FUNDS REQUIREMENTS FOR INVESTMENT FIRMS BASED ON
FIXED OVERHEADS
3. EBA FINAL draft Regulatory Technical
Standards on own funds requirements
for investment firms based on fixed
overheads under Article 97(4) of
Regulation (EU) No 575/2013 (Capital
Requirements Regulation – CRR)
EUROPEAN COMMISSION
Brussels, XXX
[…](2012) XXX draft
COMMISSION DELEGATED REGULATION (EU) No …/..
of XXX
[…]
supplementing Regulation (EU) No 575/2013 of the European Parliament
and of the Council with regard to regulatory technical standards for
Own Funds Requirements for Investment Firms based on Fixed
Overheads
7
EBA FINAL DRAFT RTS ON OWN FUNDS REQUIREMENTS FOR INVESTMENT FIRMS BASED ON
FIXED OVERHEADS
COMMISSION DELEGATED REGULATION (EU) No …/..
of XXX
[…]
supplementing Regulation (EU) No 575/2013 of the European Parliament
and of the Council with regard to regulatory technical standards for
Own Funds Requirements for Investment Firms based on Fixed
Overheads
THE EUROPEAN COMMISSION,
Having regard to the Treaty on the Functioning of the European Union,
Having regard to Regulation (EU) No 575/2013 of the European Parliament and of the
Council of 26 June 2013 on prudential requirements for credit institutions and investment
firms and amending Regulation (EU) No 648/20124, and in particular third subparagraph
of Article 97(4) thereof,
Whereas:
(1) Regulation (EU) No 575/2013 establishes, among other matters, prudential
requirements for investment firms in order to ensure that investment firms are safe and
sound and comply at all times with the capital requirements. Own funds requirements are
covered by Article 92 of that Regulation which seeks to ensure that risks stemming from
business activities are covered by a sufficient amount of own funds. According to Article
97 of that Regulation investment firms can use an alternative method based on fixed costs
to calculate the total risk exposure. It is therefore necessary to establish the methodology
for calculating fixed overheads and the list of items that would be included in the
calculations in order to have a common approach in all EU member states.
(2) In order to ensure that investment firms are able to organise an orderly winding down
or restructuring of their activities, they should hold sufficient financial resources to
withstand operational expenses over an appropriate period of time. During the winding
down or restructuring, an investment firm still needs to continue its business and be able to
absorb losses which are not matched by a sufficient volume of profits, to protect investors.
While some costs (such as staff bonuses) may decrease other costs (such as legal expenses)
may increase. Considering that not all investment firms use International Financial
Reporting Standards (IFRS) and in order to avoid regulatory arbitrage, it is essential to
follow a prudent approach for calculating own funds for these firms, whereby changes to
4
OJ L 176, 27.6.2013, p.1.
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EBA FINAL DRAFT RTS ON OWN FUNDS REQUIREMENTS FOR INVESTMENT FIRMS BASED ON
FIXED OVERHEADS
the accounting framework are automatically taken into account and cannot be arbitraged
by changing the accounting categorisation. As a result, and in order to more adequately
reflect the effect of the variable expenses in the own funds, rules on the own funds of these
firms should be based on an approach whereby variable costs are deducted from total
expenses.
(3) Given that investment firms make use of tied agents and the business carried out
through tied agents exposes investment firms to risks in the same manner as the business
carried out by the investment firms themselves, rules on the own funds requirements for
investment firms based on fixed overheads should provide for the inclusion of costs
relating to tied agents to reflect the above risks. Nevertheless, given that costs related to
tied agents have some element of variability but cannot be considered a fully variable cost
item but it would be disproportionate to include the full amount of the costs related to tied
agents to the own funds requirements, these rules should provide for the inclusion only of a
percentage of these costs in the own funds requirements. Further, in order to avoid doublecounting of amounts relating to tied agent fees, these rules should provide for the
deduction of the fees related to tied agents before the addition of this percentage to the own
funds requirements.
(4) In line with Regulation (EU) No 575/2013, which provides that competent authorities
can make adjustments in capital requirements where there has been a material change in
the business activities of the firm and in order to ensure that competent authorities apply
the same conditions across the EU, it is necessary to establish certain criteria on what
consitutes a material change. As firms vary in their size, there are some very small firms or
firms in a start-up phase for whom it would be unnecessarily burdensome to impose
adjustments in their capital requirements, given that changes are bound to be frequent for
them. Therefore minimum thresholds should be established so that these firms are
exempted from the adjustments in capital requirements if their capital requirements fall
below the threshold.
(5) The provisions in this Regulation are closely linked to the provisions of Commission
Delegated Regulation xx/xxx [draft RTS on Own Funds submitted to the COM on 26 July
2013], since they deal with own funds requirements for institutions. To ensure coherence
between those provisions, and to facilitate a comprehensive view and compact access to
them by persons subject to those obligations, it is desirable to include all regulatory
technical standards required by Regulation (EU) No 575/2013 on own funds in a single
Regulation.
(6) This Regulation is based on the draft regulatory technical standards submitted by the
European Banking Authority to the Commission.
(7) The European Banking Authority has conducted open public consultations on the draft
regulatory technical standards on which this Regulation is based, analysed the potential
related costs and benefits and requested the opinion of the Banking Stakeholder Group
established in accordance with Article 37 of Regulation (EU) No 1093/2010. The
European Banking Authority has also consulted the European Securities Markets Authority
(ESMA) before submitting the draft technical standards on which this Regulation is based.
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EBA FINAL DRAFT RTS ON OWN FUNDS REQUIREMENTS FOR INVESTMENT FIRMS BASED ON
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HAS ADOPTED THIS REGULATION:
Article 1
Amendments to Regulation xx/xxx [EBA draft RTS on Own Funds submitted on 23 July
2013]]
Regulation (EU) No xx/xxxx [EBA draft RTS on Own Funds submitted on 23 July 2013] is
amended as follows:
A new ‘Chapter 5a’ is inserted after Article 34 [numbering follows the order of the Articles
that are the legal bases, as they appear in the CRR]:
CHAPTER 5a
Own Funds based on Fixed Overheads
Article 34aCalculation of the eligible capital of at least one quarter of the fixed overheads of previous
year according to Article 97(1) of Regulation (EU) No 575/2013
1. For the purposes of Article 97(1) of Regulation (EU) No 575/2013 investment firms
shall calculate their fixed overheads of the preceding year, using figures resulting from
the applicable accounting framework, by subtracting the following items from the total
expenses after distribution of profits in their most recent audited annual financial
statements, or, where audited statements are not available, in annual financial
statements validated by national supervisors:
(a) fully discretionary staff bonuses;
(b) employees', directors' and partners’ shares in profits, to the extent that they
are fully discretionary;
(c) other appropriations of profits and other variable remuneration, to the
extent that they are fully discretionary;
(d) shared commission and fees payable which are directly related to
commission and fees receivable, which are included within total revenue,
and where the payment of the commission and fees payable is contingent
upon the actual receipt of the commission and fees receivable;
(e) fees, brokerage and other charges paid to clearing houses, exchanges and
intermediate brokers for the purposes of executing, registering or clearing
transactions;
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EBA FINAL DRAFT RTS ON OWN FUNDS REQUIREMENTS FOR INVESTMENT FIRMS BASED ON
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(f) fees to tied agents in the sense of point 25 of Article 4 of Directive
2004/39/EC of the European Parliament and of the Council 5 , where
applicable, notwithstanding the provisions of paragraph 3;
(g) interest paid to customers on client money;
(h) non-recurring expenses from non-ordinary activities.
2. Where fixed expenses have been incurred on behalf of the investment firms by third
parties other than tied agents, and these fixed expenses are not already included within
the total expenses referred to in paragraph 1, these fixed expenses shall be allocated
based on the underlying expenses of the third party, when such a break-down is
available, and investment firms shall subsequently add their applicable share of the
fixed expenses to the figure resulting from paragraph 1. When such a break-down is
not available, the investment firms shall add these expenses according to the business
plan to the figure resulting from paragraph 1.
3. Notwithstanding point (f) of paragraph 1, where the investment firm makes use of tied
agents, the investment firm shall add 35% of all the fees related to the tied agents to the
figure resulting from paragraph 1.
4. Where the firm’s most recent audited financial statements do not reflect a twelve
month period, the firms shall divide the result of the calculation of paragraphs 1 to 3 by
the number of months that are reflected in the financial statements and shall
subsequently multiply the result by twelve, so as to produce an equivalent annual
amount.
Article 34bConditions for the adjustment by the competent authority of the requirement to hold
eligible capital of at least one quarter of the fixed overheads of the previous year
according to Article 97(2) of Regulation (EU) No 575/2013
For the purposes of Article 97(2) of Regulation (EU) No 575/2013, competent authorities
shall consider that a material change has occurred in the business of an investment firm
since the preceding year as follows:
(a) For either of the following types of firms:
(i)
investment firms whose current own funds requirements based on fixed
overheads are equal to or more than EUR 125 000;
5
Directive 2004/39/EC of the European Parliament and of the Council of 21 April 2004 on markets in financial
instruments amending Council Directives 85/611/EEC and 93/6/EEC and Directive 2000/12/EC of the European
Parliament and of the Council and repealing Council Directive 93/22/EEC (OJ L 145, 30.4.2004, p. 1).
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EBA FINAL DRAFT RTS ON OWN FUNDS REQUIREMENTS FOR INVESTMENT FIRMS BASED ON
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(ii)
investment firms whose own funds requirements based on current fixed
overheads are less than EUR 125 000 but which, based on projected fixed
overheads, equal or exceed EUR 150 000,
where one of the following conditions is met:
(i)
the change in the business of the firm results in a change of 20% or greater
in the firm’s projected fixed overheads;
(ii)
the change in the business of the firm results in changes in the firm’s own
funds requirements based on projected fixed overheads equal to or greater
than to EUR 2 million.
(b) For investment firms whose own funds requirements based on current fixed
overheads remain below EUR 125 000 but which, based on projected fixed
overheads, are less than EUR 150 000, where the change in the business of the firm
results in a 100% or greater change in the firm’s projected fixed overheads.
Article 34cCalculation of projected fixed overheads in the case of an investment firm that has not
completed business for one year according to Article 97(3) of Regulation (EU) No
575/2013
Where a firm has not completed business for one year from the day it starts trading, it shall
use, for the calculation of items (a) to (h) of Article 34a, paragraph 1, the projected fixed
overheads included in its budget for the first twelve months' trading, as submitted with its
application for authorisation.”
Article 2
Final provision
This Regulation shall enter into force on the twentieth day following that of its publication
in the Official Journal of the European Union.
This Regulation shall be binding in its entirety and directly applicable in all Member
States.
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EBA FINAL DRAFT RTS ON OWN FUNDS REQUIREMENTS FOR INVESTMENT FIRMS BASED ON
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Done at Brussels,
For the Commission
The President
[For the Commission
On behalf of the President
[Position]
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4. Accompanying documents
4.1 Cost- Benefit Analysis / Impact Assessment
4.1.1 Introduction
1. Under Article 10(1) of the EBA Regulation (Regulation (EU) No 1093/2010 of the
European Parliament and of the Council) any draft regulatory technical standards
developed by the EBA – when submitted to the European Commission (EC) for adoption
should be accompanied by an analysis of ‘the potential related costs and benefits’. This
should provide the reader with the problem definition, the options identified to deal
with this problem and the potential impact thereof.
2. This note outlines the EBA’s assessment of the impact of the requirements regarding the
calculation of fixed overhead requirement used to calculate the total risk exposure of
investment firms. The development of these RTS covering these matters stems from the
requirement presented in Article 97(4) of Regulation (EU) No 575/2013 of the European
Parliament and of the Council on prudential requirements for credit institutions and
investment firms (CRR).
4.1.2 Problem definition
Issues addressed by the EC and the EBA regarding the calculation of fixed overhead requirement
3. Investment firms have to calculate their capital resources requirement taking into
account the risk-weighted exposures the firm has to the markets and other firms and
general overheads. Once calculated, the relevant parts of the capital resources
calculations should exceed the relevant sections of the capital resources requirement in
order for the firm to meet its prudential requirements.
4. Directive 2006/49/EC (CRD) requires investment firms to calculate a quarter of the firm’s
relevant fixed expenditure or total expenditure in the firm’s most recent audited annual
report and accounts, excluding certain expenses. The requirements regarding this
calculation currently vary between Member States and this calculation is not uniformly
conducted across the EU.
5. These RTS will supplement at a technical level the provisions of the CRR and clarify how
an investment firm should calculate its overhead expenses for the purpose of estimating
its capital resources. These clarifications will contribute to achieving some of the
following specific objectives defined by the EC in its impact assessment of the CRR:
►
►
►
S4: enhance legal clarity
S5: enhance level playing field
S6: enhance supervisory cooperation and convergence.
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4.1.3. Technical options considered
6. The EBA considered two alternatives regarding the content of the draft RTS relating to the
definition of fixed overheads:
►
►
Option A: define fixed overheads as a positive list (‘additive procedure’), which means
listing all the cost items that would have to be included as fixed overheads; or
Option B: define fixed overheads as a negative list (‘subtractive procedure’), which
means deducting a more limited list of variable costs from total expenses.
7. Option A entails a definite list of fixed overheads to be added up and would ensure a high
degree of comparability across countries. A complete list could be generated under IFRS, but,
given that this RTS applies only to investment firms with limited authorisation to provide
investment services, which are often non-IFRS firms, such a list would need to be adapted to
take into account national generally accepted accounting principles (GAAPs) and would result
in different lists for many countries. Another disadvantage of using option A would be that
any subsequent changes to the accounting standard would not be incorporated.
8. Option B, a subtractive approach, is based on deducting certain variable cost items from the
total expenses calculated according to the applicable accounting framework. This approach is
more prudent, as changes to the accounting framework are automatically taken into account
and cannot be arbitraged by changing the accounting categorisation. Furthermore, it requires
fewer adjustments for those firms that do not use IFRS, which include most of the smaller or
limited-authorisation investment firms affected by these RTS.
9. The EBA favours option B, the subtractive approach, as it is more prudent. Moreover, as many
investment firms are likely to use national GAAPs rather than IFRS, this approach will be
simpler to implement.
Tied agents
10. The EBA is proposing to include a provision for investment firms providing investment
services through their tied agents. When an investment firm with tied agents is winding
down, it is likely that some of its tied agents will also have to wind down their business. As
calculating fixed overheads for tied agents in the same manner as for investment firms
themselves would be challenging, the EBA suggests adding a fixed percentage of the costs per
tied agent instead. This method addresses the fact that tied agents have some element of
variability in some cases but cannot be considered a fully variable cost item.
Thresholds for the adjustment of capital requirements by competent authorities
11. Own funds requirements are generally set for one year. During that time, firms may face a
material change in the level of projected overheads or in the activities allowed in the firm’s
authorisation (e.g. a firm withdraws some of the services it has provided or gets an
authorisation to provide more services). As a result of a large change, a capital requirement
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FIXED OVERHEADS
based on projected overheads may no longer be aligned with the actual level of capital
needed by a firm. The EBA, therefore, introduces thresholds defining when a change in
business activities is large enough that competent authorities should allow adjustment to the
capital requirement. Introducing thresholds would enable harmonisation regarding what
constitutes a ‘material change’ and would fulfil the mandate of the EBA and ESMA under
Article 97(4)(b) of the CRR.
12. The EBA proposes to implement an absolute and a relative threshold. The absolute threshold
would be introduced for larger investment firms in order to address changes in capital
requirements considered material in an absolute sense, which would affect larger investment
firms.
13. The proposal tries to strike the right balance regarding the level of the threshold. A low
materiality threshold would increase the supervisory burden for national competent
authorities, given that competent authorities would have to adjust the requirements even if
small changes in the business of a firm were to take place; this would not be particularly
useful or cost-efficient, particularly given the one-year horizon of this requirement.
14. On the other hand, a high materiality threshold could lead to situations in which investment
firms might hold either insufficient capital, when a company is expanding, or an excessive
amount, when the business of a firm is shrinking. In addition, while it could be argued that a
low threshold falls within the mandate for establishing conditions for the exercise of the
competent authorities’ adjustment of capital requirements, a high threshold in the RTS would
end up circumventing the CRR provision that provides the national supervisory authorities
(NSAs) with the power to adjust capital requirements.
4.1.4. Impact of the proposals
Costs
15. For investment firms, the implementation of these RTS will generate two types of costs:
►
►
Direct compliance costs, as investment firms will have to check if the current calculation
they make meets the requirements of these RTS. Because most investment firms should
have already implemented the processes necessary to conduct the calculation of their
overhead expenses, this assessment should not require significant resources.
If some of the calculations currently made by an investment firm do not meet the
requirements, the institution may need to raise additional capital as a result. In Member
States where less prescriptive requirements than those proposed by these RTS are in
place, investment firms are more likely to have to raise additional capital.
16. The implementation of these RTS may have additional resource implications for NSAs, in
terms of additional staff time for supervision. However, these additional resources should
not be significant, as NSAs should already be monitoring the compliance of investment firms
with the requirements on capital resources.
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Benefits
17. By establishing harmonised practices for the calculation of fixed overhead requirements, the
RTS will ensure that institutions in different Member States use the same practices when
they estimate their capital resources requirement, ensuring legal clarity and a level playing
field, as well as facilitating the calculation of this requirement for cross-border firms.
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4.2 Feedback on the public consultation
The EBA publicly consulted on the draft proposal contained in this paper.
The consultation period lasted for three months and ended on 30 September 2013. Thirteen
responses were received, of which nine were published on the EBA website.
This paper presents a summary of the key points and other comments arising from the
consultation, the analysis and discussion triggered by these comments and the actions taken to
address them if deemed necessary.
In many cases several industry bodies made similar comments or the same body repeated its
comments in response to different questions. In such cases, the comments and EBA’s analysis are
included in the section of this paper where the EBA considers them most appropriate.
Changes have been incorporated into the draft RTS as a result of the responses received during
the public consultation.
Summary of key issues and the EBA’s response
The main points raised by the industry with regard to these draft RTS are the following:
(1)
Harmonisation of the approaches used in different Member States was considered
necessary and the subtractive approach proposed by the EBA was considered appropriate.
There were comments on the list of items to be included and some terms to be clarified.
(2)
The inclusion of tied agents was generally supported but the responses regarding how to
calculate it varied.
(3)
The inclusion of three different thresholds was generally supported as was the general
approach to take into account the differences in firms regarding their size, structure and
complexity. There was some support for the introduction of a de minimis threshold for
small investment firms.
(4)
No material impact was foreseen provided that the existing proposals are adopted.
These and the other issues are addressed in detail in the feedback table ‘Summary of responses to
the consultation and the EBA’s analysis’ below.
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Summary of responses to the consultation and the EBA’s analysis
Comments
Summary of responses received
EBA analysis
Amendments to
the proposals
The proposed approach seems to be used by most
firms subject to these RTS and there is broad support
for it. Most respondents agreed with the reasoning
behind adopting this approach that it is more
prudent than the alternative approach. It also
enables firms to take into account different national
accounting frameworks and helps to reduce
regulatory arbitrage.
No changes.
The CP did not give a definition of ‘total expenses’
but did make reference to the calculations being
made according to the applicable accounting
framework.
Clarification that
distribution profits
are outside the
scope of total
expenses.
General comments
Harmonisation
Harmonisation across Member States was strongly
supported.
Proportionality
The need to take into account the differences in
firms regarding their size, structure and complexity
was emphasized by many respondents and
provisions relating to this need were welcomed.
Responses to questions in Consultation Paper EBA/CP/2013/30
Question 1
Question 2
The subtractive approach proposed by the EBA was
strongly supported by all but one respondent, who
agreed with the proposed approach generally
given the need to harmonise practices. Provisions
taking into account the differences in firms
regarding their size, structure and complexity were
also welcomed.
More than half of those who commented agreed
with the list of items as was proposed.
There were some comments on the list of variable
cost items and requests for clarification of the
term ‘total expenses’. The industry asked for
clarification about whether or not distribution
profits, contract-based profit transfers and taxes
Regarding distribution profits, they can be avoided
and there is no legal basis which requires them to be
paid; therefore this item should be treated as
No changes to the
list of items but the
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Comments
Summary of responses received
EBA analysis
on income would be outside the scope of total
expenses.
variable. This is also in accordance with the IFRS, and
the EBA agrees to exclude them from total expenses.
There were suggestions to add (i) interest paid to
counterparties and (ii) interest charges in respect
of borrowings made to finance the acquisition of a
fund’s tradable investments because they are
currently deductible under the subtractive
approach in at least one jurisdiction.
Contract-based profit transfers, however, although
they are variable and depend on the yearly
profitability, are not avoidable on a legal basis
because they are based on a contract between a
parent company and a subsidiary (usually for tax
purposes) and the subsidiary entity will have to fulfil
the terms of the contract. Therefore they should be
treated as fixed. Similarly to contract-based profit
transfers, taxes on income, although they are
variable and depend on the yearly profitability, are
incurred in the normal course of business and they
are unavoidable. On that basis, they should also be
treated as fixed expenses.
The industry also suggested adding foreign
exchange losses to the list because these losses
arise from market risk and not from the underlying
operating risk of the business and are also
currently deductible in some jurisdictions where
this approach is in use.
Finally, there were a few comments from the
industry asking to change or at least clarify
‘extraordinary non-recurrent expenses’ to avoid
the possibility that it would coincide with a
narrower concept under local accounting
principles. Moreover, extraordinary items are
recognised in the US and UK but not under IFRS.
Amendments to
the proposals
term ‘extraordinary
non-recurrent
expenses’ changes
to ‘non-recurring
expenses from nonordinary activities’.
Regarding the items ‘interest paid to counterparties’
and ‘interest charges in respect of borrowings made
to finance the acquisition of a fund’s tradable
investments’, one could argue that an investment
firm can cut down on these expenses, if the type of
borrowing is short term and the investment firm
reduces the amount of funds borrowed or agrees on
more favourable terms (lower interest rate).
Nevertheless, the EBA believes that these items are
part of the normal course of business and are
therefore fixed. In addition, there is a legal basis that
makes these types of expenses unavoidable (i.e.
contract with counterparty).
Foreign exchange losses can indeed be expected to
be variable expenses, but, given the fact that
investments of firms would usually be in several
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Comments
Summary of responses received
EBA analysis
Amendments to
the proposals
currencies, the use of foreign currency (with the risk
of foreign exchange losses) is part of the normal
course of the business of an investment firm. Any
foreign exchange loss would derive from the
positions held by the investment firm, for which
there is a legal basis (i.e., for all the positions that
the investment firm has, there should be a contract
with the terms and conditions). Foreign exchange
loss would be one of the outcomes of the contract,
and as a result it, cannot be avoided.
The EBA finds that ‘all other variable expenses’ is a
very broad term and contradicts the aim of the
subtractive approach. Therefore, the EBA does not
support this amendment but instead proposes to
change the term to ‘non-recurring expenses from
non-ordinary activities’. This would also be more in
line with the original proposal, given that most
respondents agreed with the list as was proposed in
the CP.
Question 3
The additive approach was not considered
appropriate and one respondent mentioned that it
is not flexible enough to take national differences
into account.
Given the broad support, the subtractive approach
has been maintained.
No changes.
The EBA proposed a fixed percentage taking into
account the practical issues with this calculation: it is
less burdensome and more straightforward than
other options. Given that the responses on how the
No changes.
One respondent preferred the additive approach
because it is currently used in its jurisdiction.
Questions 4–6
These questions were not commented on by many;
those who commented generally agreed with the
inclusion of tied agents. Two respondents
supported the EBA’s proposal to cover them with a
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Comments
Summary of responses received
certain amount related to a tied agent; one
suggested that the calculation be part of the
capital planning process and agreed with
supervisors; and one preferred that the
calculations be made in the same manner as for
investment firms.
EBA analysis
Amendments to
the proposals
tied agents should be addressed varied with no clear
preference for any option, and taking into account
the practical issues with the other methods of
calculating it, the EBA decided not to change the RTS
in this respect.
One respondent proposed that the percentage be
raised to 40% and one proposed to design the
calculation so that the actual expenses regarding
particular business arrangements would be
reflected.
Question 7
Question 8
The 20% threshold was supported by all but one
respondent who commented on it. One
respondent proposed 33% and suggested it be
more flexible and proportionate.
The introduction of a de minimis threshold for
small firms did not receive many comments and
the views of those who commented were divided
with some arguing that it would protect small
firms, allowing them to expand, and others arguing
that this threshold is not necessary.
The amount of EUR 125 000 (which is also the
initial capital required by the UCITS Directive) was
proposed by two respondents. One respondent
said that it should be a percentage of fixed
overheads requirements (however, no specific
percentage was proposed).
No changes.
The EBA did not propose an amount because the
sizes of investment firms vary significantly. A de
minimis amount of EUR 125 000 means that changes
to the capital requirements based on fixed
overheads would be considered by the competent
authorities only for firms with at least EUR 500 000
of annual fixed costs. Therefore, the EBA proposes to
set a de minimis amount of EUR 125 000, which, in
effect, would apply only to very small firms.
However, in order to ensure that a backstop exists
for small investment firms whose capital
requirements based on fixed overheads are less than
EUR 125 000, it is suggested that the change in fixed
overheads should be 100%.
Introduce a de
minimis amount of
EUR 125 000 of the
capital requirements
based on fixed
overheads.
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Comments
Question 9
Questions 10–11
Summary of responses received
Three respondents agreed with the EUR 2 million
absolute threshold, two were against it and one
did not consider it applicable given the current
sizes of firms in its jurisdiction.
Out of those who were against this threshold, one
did not consider any threshold necessary and the
other questioned the absolute value of it and how
it was derived.
No material impact was foreseen, provided that
the subtractive approach is introduced. There were
no comments on the impact analysis, except from
one respondent who agreed with it.
EBA analysis
Amendments to
the proposals
Introduction of a EUR 2 million absolute threshold
seems appropriate.
No changes.
No changes.
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